National Audit Office Finds Further Room for Generic-Associated Savings in Norway

The Norwegian National Audit Office (NAO) has published the results of its survey into domestic generic prices (for full report (in Norwegian) please click here). The aim of the survey was to determine whether current governmental regulations result in lower generic prices in the country and whether the regulations deliver at their maximum potential. In a nutshell, the NAO found that although pharmaceutical prices in Norway were amongst the lowest in the European Union, there was still potential for additional generic-associated savings.

To come to its conclusions and recommendations, the NAO compared Norwegian pharmaceutical prices with international standards, determined distribution margins on generics, investigated generic availability in the country and evaluated whether or not current governmental regulations on pharmaceutical prices were implemented to their full potential.

Norwegian Pharmaceutical Prices are Lower than International Average

In the spring of 2008, a Ministry of Health and Care Services-commissioned study conducted by the Institute for Research in Economics and Business Administration (SNF) found that Norwegian pharmaceutical prices were as a whole the lowest among the surveyed countries (see Norway: 11 June 2008: Norwegians Enjoy Cheapest Medicine Prices in Western Europe). The only measure when Norway did not rank as the cheapest country surveyed was for the overall generic market, when Denmark emerged as the cheapest country.

Norway has long intended to drive pharmaceutical prices down. In 2008, pharmaceutical expenditure amounted to 17.2 billion kroner (US$2.6 billion) at pharmacy retail prices, of which an estimated 8.4 billion kroner was funded from the public purse. In order to drive prices down, Norway implements two pivotal cost-containment measures. With regard to the pricing of prescription medicines, Norway sets a maximum pharmacy purchasing price based on international prices in Austria, Belgium, Denmark, Finland, Germany, Ireland, the Netherlands, Sweden and the United Kingdom. The Norwegian maximum pharmacy purchasing price is calculated as the average of the three lowest reference prices. With regard to the pricing of some generic medicines, Norway relies on a stepped price system (trinnprismodellen) under which, the price of a generic active ingredient is reduced step by step by preset rates once the originator drug has lost patent protection and is subjected to generic competition. The step price corresponds to the active ingredient's maximum reimbursement price under the National Insurance Service and it is set as a percentage of the originator drug's maximum price at the time it became exposed to generic competition. The Norwegian Medicines Agency maintains a list of drugs included in this system. For each substitution group, one generic should be available at the step price.

Sky-High Distribution Margins on Generics Included in the Step-Price System

The NAO survey found that the average distribution margins on generics included in the step-price system stood at a staggering 411% in 2007 (see Table 1), which represents an average mark-up of 121 kroner by package, exclusive of value added tax (VAT). The average distribution margin on those drugs checked in at 564% in 2006 and 290% in 2005. Margins on generics that have been included in the step-price system for at least 12 months (established generics) are even higher as they stood at 538% in 2007, which represents an average mark-up of 118 kroner by package, exclusive of VAT.

Meanwhile, the average distribution margins on originator drugs whose active ingredient is included in the step-price system stood at 76% in 2007, which represents an average mark-up of 92 kroner by package, exclusive of VAT.

Reimbursed Generics Have Low Market Presence in Norway

The NAO survey found that the proportion of reimbursed generics present on the Norwegian market is low by Scandinavian standards (see Table 2). The NOA found that generic market entry is delayed in Norway because the Norwegian Medicines Agency (NoMA) suffers from a chronic backlog of marketing authorisation applications (MAAs, see Norway: 6 March 2009: Industry Association Accuses Norwegian Medicines Agency of Violating EEA Laws). The NAO revealed that in 2007, hardly any MAAs were processed within the statutory 30 days and the average handling time was three months. The situation got worse in the first half of 2008 as about 33% of MAAs had a case handling time of eight months.

Potential to Lower Norwegian Pharmaceutical Expenditure

The NOA concluded that although generic prices are low in Norway, they may still be higher than necessary. The watchdog suggested the following measures to increase competition in the market and ensure that generics are accurately priced:

• Improvements of MAA handling times for faster generic market entry;
• Swifter inclusion of generics onto the substitution list and recording of generic step price;
• More stringent checks of the international prices of originator drugs whose active ingredient is included in the step-price system.

After generics are granted marketing authorisations, the NoMA decides on their inclusion onto the country's substitution list. When generic competition is established, the active ingredient is given a step price that is then recorded by the authorities. For the period spanning from 2005 to 2007, the NAO pegged the saving shortfall from delayed step-price attribution after established generic competition at 44 million kroner.

As the generic step price relies on the originator drug's maximum price at the time it became exposed to generic competition, the NAO highlighted the economic importance for accurate collection of international reference prices. The NAO found that the NoMA actually has access to the Danish, Swedish, Irish and Finnish pricing databases, meaning that for five out of the nine reference countries, the NoMA exclusively relies on manufacturers' pricing data. Furthermore, random checks in the four countries that the NoMA can access stand at less than 2%. After comparing IMS and manufacturers' price data, the NAO concluded that there were no deliberate price reporting errors from manufacturers. Nevertheless, the watchdog found that the system leaves room for errors, which can have significant financial implications for public expenditure if not captured and therefore recommended more stringent and frequent controls of international prices for originator drugs. Furthermore, the NAO suggested that the NoMA make sure that it uses international market prices and not official list prices when it collects its data. The matter was referred to Parliament.

Outlook and Implications

In a nutshell, the NAO has demonstrated that the country's step-price system does not guarantee that generic prices are at rock-bottom levels and that there is further room for savings. In light of the NOA's survey, one of the most obvious targets for savings is distribution margins. Another way to increase the generic-associated saving potential is to increase competition in the market through faster generic market entry. With regard to the NAO's recommendation to speed up attribution of step prices, this could be done without any legislative changes. With a number of generics coming off-patent in the next few years, Norway has room to expand the number of active ingredients included in the step-price system and maximise savings potential by doing so swiftly. This would be to the detriment of originator brands as once their active ingredient is included in the step-price system, their market share decreases significantly.

On margins, Norway regulates the retail price of generics included in the step-price system, meaning that ex-manufacturers and pharmacy acquisition prices are left to market forces. In Norway, the largest three pharmaceutical distributors are vertically integrated with pharmacy chains, which on 1 January 2009 cumulatively held 95.5% of the retail drug market. Therefore, the vertically integrated distributors have significant purchasing powers and can pocket the differential between the ex-manufacturer and retail prices of generics. Norway could look at implementing a claw-back system similar to that in place in the United Kingdom to ensure that the State captures part of the discounts to be had in the pharmaceutical supply chain. This system would be likely to drive ex-manufacturer prices of generics further down as distributors could try to recoup their losses through tougher negotiations. Alternatively, Norway could be looking at regulating distribution margins on generics. In this case, ex-manufacturers prices are unlikely to suffer as if the country considers a system similar to that in place for originator drugs, the higher the acquisition price, the higher the distribution margin. Norway will however need to be mindful of keeping financial incentives in place for pharmacists as dispensing generic medicines involves greater time involvement. Significantly reducing economic incentives could result in pharmacists dispensing the originator brand, which would be counter productive. Indeed, in 2007 the average ex-VAT retail price of an originator drug whose active ingredient was included in the step-price system stood at 214 kroner while that of its generic equivalent stood at 151 kroner.